FedEx signals intent to consolidate its operating companies into one organization

Major changes are coming for Memphis-based global freight transportation and logistics services providerFedEx, with the company announcing today that, effective June 2024, it will consolidate all of its operating companies into a single organization.

FedEx described this consolidation as a phased transition that will subsequently bring nearly all of its operating companies—FedEx Express, FedEx Ground, FedEx Services, as well as other FedEx operating companies—into Federal Express Corporation, and transition into what it called a single company operating a unified, fully integrated air-ground network. And it also noted that its less-than-truckload subsidiary, FedEx Freight, will remain as a standalone operation within Federal Express Corporation.

“Over the last 50 years, we built networks that have created a differentiated and unmatched portfolio of services,” said Raj Subramaniam, president and CEO, FedEx Corporation, whom will oversee the combined organization. “This organizational evolution reflects how we represent ourselves in the marketplace—focused on flexibility, efficiency, and intelligence. As one FedEx team, we are well positioned to execute on our mission to help customers compete and win with the world’s smartest logistics network.”

The top FedEx executive added that the company is building a simplified experience for its customers, who are at the center of everything it does, so they can adapt to the market. He also noted that this combination will allow FedEx to provide customers with even greater value, offering the most advanced data-driven insights to help them make smarter decisions for their business.

What’s more, FedEx said that this consolidation will play a key role in facilitating the company’s DRIVE initiative, which includes Network 2.0, a years-long effort focusing on the operational efficiency, in which the company picks up, transports, and delivers packages in the U.S. and Canada. Another benefit of the consolidation, it cited, is to “bring distinct focus on the air network and international volume, as well as a more holistic approach to operations on the ground utilizing both FedEx employees and contracted service providers.”

From an executive personnel perspective, FedEx said that, effective April 16, John Smith, President and CEO of FedEx Ground, will transition to President and CEO of U.S. and Canada Ground Operations at FedEx Express and also lead surface operations for the FedEx Express, FedEx Ground, and FedEx Freight Businesses. And Richard Smith, President and Chief Executive Officer of FedEx Express, will become President and CEO, Airline and International, at FedEx Express.

The company expects the consolidation to enable it to save $4 billion worth of permanent cost reductions in fiscal 2025, with $1.2 billion in Surface Network; $1.3 billion in Air Network & International; and $1.5 billion in General & Administrative. FedEx added that Network 2.0 is expected to generate another incremental $2.0 billion in savings in fiscal 2027, noting that it is projecting costs up to $2 billion by the end of 2025 to implement its business optimization initiatives, which include DRIVE and Network 2.0.

The expected $1.2 billion in Surface Network savings is pegged to come from $450 million in ground linehaul operations; $300 million in ground dock operations, $150 million in P&D (pickup and delivery) operations, and $300 million in express U.S. surface operations. FedEx said that it will be increasing the use of company-owned intermodal containers for 90% of the volume it moves by rail, while increasing its miles on rail transport from 8% to 15%, for an expected $80 million in savings, coupled with a 6% reduction for volume in international containers, as well as a 36% reduction in rates on rail compared to on-the-road transportation.

This announcement comes at a time when FedEx’s earnings have been impacted by the ongoing pair of demand weakness and inflation. That was evident in the company’s third quarter fiscal earnings, which were announced in mid-March, with quarterly revenue—at $22.2 billion—down 6% annually, and net income—at $865 million was below the $1.22 billion recorded a year ago. Diluted earnings per share—at $3.41—fell 7.4%.

FedEx said that said quarterly results were negatively affected by continued demand weakness, particularly at FedEx Express and added that operating income was negatively affected by the effects of global inflation, which were partially offset by U.S. domestic yield improvement and cost-reduction actions.

On its earnings call, Subramaniam explained that the cost-reduction actions supported margin expansion at both ground and freight, but have not yet fully offset the impact of continued pressures at Express. And he added that FedEx is committed to addressing these cost imbalances, and will be taking further actions in the coming months, including a more pronounced readjustment of the air network.

John Haber, president of the parcel business unit for transportation and logistics services provider Transportation Insight, told LM that this development is not unexpected, with things heading in this direction, based on various operational-related steps the company has been taking leading up to it.

“I think this is a good move for FedEx,” said Haber. “It is something it had to do, and it is very positive overall. My one concern is what happens on the union side now when you are combining these entities, as these individual groups are in different [union] pacts. They are not classified in the same way as UPS. Outside of that, it is very good for them and something they needed to do.”

With top-line revenue growth being pressured by lower volumes, which has been the case across all modes, Haber said parcel is not immune to that, unlike when parcel volumes exploded during the early days of the pandemic.

“There is excess capacity in the parcel market right now, and pricing is being pressured, with less volume, so the way to make shareholders happy is to cut costs,” he said. “FedEx is very focused on cutting costs to improve profitability, at a time when volumes are dropping.”

Jerry Hempstead, president of Hempstead Consulting, said that this development signals that FedEx is going to move a lot more volume on the rails, as its largest competitor, UPS, has done for decades. He also noted that, in the air, FedEx is going to be moving more deferred international on other people’s planes, through its Global Partner Network, because it’s less expensive and will look more like a forwarder.

“FedEx is also testing having one route driver for both air and ground packages (so they will look more like UPS) and was the Airborne Express model,” he said. “Airborne could get it to work with contractors; I’m sure Fedex can figure it out as well. All these initiatives are aimed at taking large costs out of the business. Hopefully, FedEx will be sharing those savings with the shippers that have been paying for the inefficiencies for so long.”

From a shipper perspective, Paul Yaussy, Senior Consultant Professional Services, for San Diego-based Shipware, explained that for years as a FedEx shipper customer, was told by FedEx that the separate business units and networks would never merge, but it is now finally going to happen.

“这是一个绝好的消息,联邦快递发货人should see immediate impacts of a singular pickup and delivery experience,” he said. “In the current state, operations teams received a separate pickup and delivery for both Ground and Express. Those are often viewed as interruptions in the day, as it often takes someone away from a task to go accept deliveries or assist with the pickups. In a retail environment, many stores have as small a staff as possible during mid-day hours, but that’s when many of the pickups and deliveries happen. Some stores could literally have one person at a cash register and another at the back door working with the FedEx driver, but no one working the floor assisting customers. So, for those shippers who measure productivity efficiency, they should notice a marked improvement in their KPI’s related to shipping and receiving by cutting their pickups and deliveries in half.”

Yaussy’s colleague, Adi Karamcheti, Senior Consultant Professional Services for Shipware, as well as a former FedEx sales representative, said that the toughest part of selling FedEx services was the “Two pickups” objection clients had.

“With more Express than Ground trucks and since the ground drivers were contractors, the ground pickups were almost always earlier than clients wanted,” he said. “There has always been confusion around dropping packages off too. It is generally much easier to drop off an Express package at a FedEx Express station than dropping a ground package off at a Ground terminal. This will make sales life much easier. This also takes away a selling point from the UPS sales team. I think this has always been somewhat inevitable. It is simply inefficient to maintain two separate networks. It’s poor customer service to make customers figure out how to get their package into one of two networks. This is a big win for customers too.

While this also makes a lot of sense as it relates toFedEx’ DRIVE programto reduce costs, Karamcheti said he is curious to see how FedEx implements this on the operational side.

“Express stations tend to be near the airport. The ground hubs and terminals are often not,” he said. “How do they handle this from a labor perspective, especially with their Ground contractors? Do they pay per Express piece? Do they combine next day ground shipments with local next day Express shipments?

Shipware Team Lead-Client Success Matthew Sumoski, also a former UPS sales representative, highlighted how the “Power of One” is a phrase heavily leveraged among the UPS sales force.

“这意味着他们有一个司机/一个网络广告vantage,’ compared to the split FedEx network, as it relates to ground and air/international,” he said. “This phrase is typically contained in every QVP (quantified value proposition) presented by UPS, where FedEx is considered a viable threat. FedEx formally announcing that they will be combining networks, takes a huge negotiating tool off the table for UPS representatives. They would lean on this for operational efficiency, dock hours, and overall ease of fulfillment. Once FedEx fully establishes this combined network, the ‘Power of One’ will be a thing of the past.”